Content
International expansion strategy of Starbucks in China
Submitted to:
Lyn Borrow
By
SIAMAK MOULAEIFAR 20207133
March 2010
1
Abstract............................................................................................................................................... 3
1. Introduction ……………………………………………………………………………………. 3
2. About the Starbucks Corporation ……………………………………………………………. 4
3. Expansion potential of chine’s industry ……………………………………………………… 4
4. Starbucks operation in China ………………………………………………………………… 5
5. Starbucks major issue is to stay active and competitive in the Chinese market …………... 6
6. Recommendation and conclusion …………………………………………………………….. 6
Reference ………………………………………………………………………………………..… 7
Abstract
2
The name Starbucks is practically synonymous with premium coffee. Starbucks has found the demand of
being global, even in tea drinking countries such as China and the UK. The first Starbucks outlet on the
Chinese mainland opened in Beijing in 1999, Starbucks has become one of the most popular brands with
350 outlets in several big cities in this country, such as Beijing, Shanghai, and Guangdong.
China has already experienced a substantial growth in the field of international business with an average
annual GDP growth rate above 10%. Starbucks operated its business under different joint ventures, and also
owned stores itself in China. International companies experience difficulties staying active and competitive
in the Chinese market. Starbucks as a foreign company experience the challenge of the domestic business
environment of China, particularly by the socio cultural value system implemented in the country. China has
nearly 5,000 years of tea drinking and has been known for being culturally fixed reason why when it comes
in prioritizing business environment, its domestic business always come in first followed by its international
counterpart. Therefore, Starbucks as a foreign company should consider the impact of the expansion in
domestic business environment of the China because just like any other countries, China is just being
protective of its own business.
However, investment opportunity in China allows Starbuck to get support from the chine’s government as
well as chine’s people. Collaboration between Starbucks and coffee farmers and suppliers can provide core
competence for Starbucks and help company to establish Starbucks as the most recognized and respected
brand in China.
1. Introduction
For over decades, globalization has been a key factor in decisions by many organizations seeking expansion
and high profits. Companies engage in international business to expand sales, to acquire resources and to
diversify or reduce their risk1. Thus, China is the emerging force in today’s business world and its domestic
market bears huge growth potential for multinational companies. The paper aims to critically evaluate major
issue for international expansion strategy of Starbucks in China.
2. About the Starbucks Corporation
The name Starbucks is practically synonymous with premium coffee. As opening the first location in 1971
in Seattle’s Pike Place, nowadays, Starbucks has become the largest speciality coffee store in the world.
1
Daniels, J. Radebugh, L. Sullivan, D. International Business Environment and Operation, 12th edition, (Pearson Education , 2009) p 94
3
Exhibit below provides a summary scope of Starbucks operation today. (Below figures refer to year ended
31 January 2009)
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Source: Adapted from Starbucks annual report 2009
Starbucks sells drip brewed coffee, espresso based hot drinks, other hot and cold drinks, coffee beans,
salads, hot and cold sandwiches and snacks. The coffee industry has a high intensity of competition,
Starbucks direct competitors include: Diedrich, Brewsters and New World.
3. Expansion potential of chine’s industry
The internationalisations of the foodservice market drive most leading players to expand their international
operations. Exhibit in below provides top 10 global operators by sales in 2008.2
McDonald's
McDonald's Corp
Corp
Yum!
Yum! Brands
Brands Inc
Inc
Burger King Holdings Inc
Wendy's/Arby's Group
Wendy's/Arby's Group
Doctor's Associates Inc
Seven
Seven &
&I I Holdings
Holdings Co,
Co,
Ltd
Ltd
Starbucks Corp
Dunkin' Brands Inc
Dunkin' Brands Inc
Darden Restaurants Inc
DineEquity Inc
DineEquity Inc
Source: Euromonitor International, Global Consumer Foodservice, 2009.
Starbucks has found the demand of being global, even in tea drinking country such as the UK. China has
already experienced a substantial growth in the field of international business because aside from its local
companies going international, many international companies from different countries have already started
to dominate the Chinese market.
2
Euromonitor International, 2009, Global Consumer Foodservice.
4
China has been the fastest growing major nation for the past quarter of a century with an average annual
GDP growth rate above 10%3. Chinese economy has grown faster than predicted. As a result, despite the
global recession it was perceived that the Chinese economy will continue to grow. The coffee industry in
china has a high intensity of competition, however sales through cafés/bars grew by 8% to RMB36 billion
(over £3,487million). In addition chained specialist coffee shops saw the highest value growth in 2008, of
22%.4
For Starbucks the China market is important to the Company’s long term growth prospects but doing
business there can be challenging. China has the biggest world’s population (1.3 billion) with an average
annual disposable income growth rate above 10.6%5 and coffee drinking is popular among Chinese white
collar workers aged between 25 and 40 therefore, this segment has great potential consumers (Exhibit below
provide age distribution in China6 ). In addition, modern lifestyle of Chinese teenagers and adults supports
the western specialty coffee shops can be beneficial to Starbucks for example, meeting and negotiation
business in a warm and characterless designed coffee shop has become more popular in China.
Age distribution in China
8%
20%
0 - 14
15 - 64
65 & Over
72%
Source: CIA World Factbook, 2009
4. Starbucks operation in China
The first Starbucks outlet on the Chinese mainland opened in Beijing in 1999; there are around 350 outlets
in several big cities in China, such as Beijing, Shanghai, and Guangdong 7. Starbucks operated its business
under different joint ventures, and also owned stores itself in China. President Starbucks Coffee Shanghai
Ltd was in charge of the business in Shanghai and the Yangtze Delta region; Beijing Mei Da Coffee Co Ltd
operated the business in Beijing and Tianjing; while Maxim’s (China) Management Ltd was responsible for
the South China region, mainly in Shenzhen and Guangzhou8.
5. Starbucks major issue is to stay active and competitive in the Chinese market
Starbucks as a foreign company experience the challenge of the domestic business environment of China,
particularly by the socio cultural value system implemented in the country. Daniels & Sullivan 2009 stated,
“Culture refers to learned norms based on the values, attitudes and beliefs of a group of people”. China has
3
Www. BBC.com China economy 2009, [accessed 21 Mar 2010]
4
Euromonitor International August 2009, Cafés/bars - China
5
CIA World Factbook, 2009
6
ibid
7
Starbucks annual report - 2009
8
Euromonitor international, August 2009, Starbucks company profile
5
nearly 5,000 years of tea drinking and has been known for being culturally fixed reason why when it comes
in prioritizing business environment, its domestic business always come in first followed by its international
counterpart. Consequently, it is quite predictable that international companies experience difficulties staying
active and competitive in the Chinese market. It is quite difficult for foreign culture to get Chinese
consumers’ consideration for certain products and services. For example, in 2003, through acquisition of
Eachnet, eBay came to China9. Many analysts thought that eBay would be successful but, nearing the end of
2007 eBay had invested over $300 million into eBay China but, had next to nothing to show for it. On
China’s playing field, brands that have a big name abroad have little guarantee of having a successful image
in China. Understanding how to localize a brand is key success for a company. As a result, Starbucks are
the ones who have to adjust, particularly on their operations in order to get the consideration not only of the
consumers but of the whole country as well. Starbucks needs to understanding the context of domestic
business environment in china as is crucial for success of expansion in China.
What is more, since China recognize the fact that foreign investors and companies are a big help in
economic booming, the national government has developed some measures in order to ensure that both
domestic and foreign companies would work harmoniously but, did not diverted the country’s priority for
improving its domestic business environment because the country is still committed in doing so therefore,
this is evident Chinese government’s actions in order to protect its own business environment.
6. Recommendation and conclusion
The Starbucks is more like a luxury to Chinese people and people do not go there for the coffee, they go
there to present themselves as modern Chinese people into the public setting therefore, Starbucks outlets
need to provide real “coffee shop experience” for its consumers by offering premium coffee in relaxing and
comfortable surroundings.
Also outlets should typically locate in high traffic business and retail centres, and should be in visible
locations in order to targeting high income consumers. Therefore, Starbucks should establish a highly
respected brand in first tier cities in China. Afterwards the company can then get a wider acceptance with
the expansion into more second tier cities, such as Yantai, Nantong, Changsha and Fuzhou in order to bring
the Starbucks experience to locals. Also, coffee is more of a luxury product so it is those people/places with
the most amount of disposable income to spend that should be targeted intensely. In China population below
poverty line accounted for 2.8 % and highest income belong to 10 % of population10.
Moreover, the Chinese coffee market has been growing by 70% in total volume sales between 2003 and
2008 to reach 11,073 tonnes11. Therefore, a perspective growth in production of coffee beans in China
appealed to Starbucks’ investment. For an advantage, the China domestic market can supply rich coffee
beans, instead of importing from the United States. This investment opportunity in China allows Starbuck to
get support from the Chinese government, as well as their whole nation. Collaboration between Starbucks
and coffee farmers and suppliers can provide core competence for Starbucks and help company to establish
Starbucks as the most recognized and respected brand in China.
References
9
Mangalindan, M. (2006) China May Be eBay’s Latest Challenge as Local Rivals East into Market Share, Wall Street Journal,
New York, N.Y.; October 12, 2007.
10
CIA World Factbook, 2009
11
Euromonitor International August 2009, Coffee - China
6
Daniels, J. Radebugh, L. Sullivan, D. 2009. International Business Environment and Operation, 12th
edition, Pearson Education.
Mangalindan, M. (2006) China May Be eBay’s Latest Challenge as Local Rivals East into Market
Share, Wall Street Journal, New York, N.Y.; October 12, 2007.
www.BBC.co.uk
China economy 2009, Available at:
http://www.bbc.co.uk/worldservice/business/2010/01/100121_china_economy_wbn.shtml
[Accessed 21 Mar 2010]
www.cia.gov
CIA World Factbook, 2009, Available at: https://www.cia.gov/library/publications/the-world-
factbook/geos/ch.html [Accessed 21 Mar 2010]
www.portal.euromonitor.com
Euromonitor International August 2009, Cafés/bars – China, Available at:
https://www.portal.euromonitor.com/Portal/ResultsList.aspx [Accessed 21 Mar 2010]
Euromonitor international, August 2009, Starbucks Company profile, Available at:
https://www.portal.euromonitor.com/Portal/ResultsList.aspx [Accessed 21 Mar 2010]
www.Starbucks.com
Starbucks annual report – 2009. Available at:
http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual [Accessed 21 Mar
2010]
